Thursday, 13 March 2014

A fixed rate mortgage is the right move right now

A fixed rate may be the prudent choice for homeowners shopping for a mortgage right now, that's according to a new report out by BMO Capital Markets today called "Mortgage Choices: The Fix(ed) is In.” The report says, the "reason fixed rates are attractive in the current environment is that short-term rates are already at extreme lows. Considering the likely upward trend in interest rates as the global recovery picks up speed in 2014, this may be one of those rare periods when a fixed rate turns out to be the superior choice."

I'm a staunch supporter of floating rate loans, but even I fixed my mortgage last year at  2.99 on a four year term. Traditionally a variable rate mortgage has been financially better for homeowners, but based on today's rates I agree that going with a fixed term is the best move. That's because the difference between fixed and variable is so little and every indication is rates will start to rise in the next year. One thing we know for sure is rates can't go much lower, so by fixing in you are taking very little downside risk. But that doesn't mean you should not consider a variable rate. Here's what you should know when shopping for your mortgage.

A variable rate mortgage is connected directly to the banks prime rate. Which means it can change over the course of you term. When you sign up you are given a rate that correspondent directly to the current prime rate banks are offering. They set this rate in accordance to what the Bank of Canada has sets has its overnight lending rate. Essentially how much it charges to lend money to the banks. Naturally when it gets more expensive for the commercial banks to borrow from the Bank of Canada then they have to raise prime to reflect their higher cost of borrowing.

 A fixed rate mortgage is more straight forward, you fix your rate with the financial institution of your choosing and for the duration of your term you will pay the same interest rate on your mortgage. Your payments will never increase and you will know exactly where you mortgage will be at the end of the term.

If you can handle a certain amount of risk a variable rate is right for you. My recommendation would be you still make payments as if you were on a fixed rate, so much higher than what the variable rate is. This will make sure you can afford any rate increase when it happens, it will also mean you are paying your mortgage off faster.

If you have a low risk tolerance and like to control your financial future, go for a fixed rate mortgage. But make sure you shop around for the best rate possible.  Mortgages are the banks biggest business; they will do anything to get you as a client. Even a few percentages off your mortgage will save you thousand over the 5-year term






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